Investing

5 Key Themes For Investors To Watch In 2021

Technology, healthcare and environmental stocks were the three themes that dominated markets in 2020 as the coronavirus changed the way we live. But what about next year, now Covid-19 vaccination programs are underway around the world?

If you had exposure to one or more of those themes then you’ve probably done pretty well. From the despair of the global stock market crash of March when the pandemic took hold, equities went on to scale new heights as authorities worldwide unleashed an unprecedented torrent of fiscal and monetary stimulus.

Big tech was the poster child of the rally. The shares of Facebook, Alphabet, Amazon
AMZN
, Apple
AAPL
, Microsoft
MSFT
and Netflix
NFLX
all doubled in price or thereabouts as the big beneficiaries of the so-called “stay at home” trade during the lockdowns.

Many pharmaceutical stocks also saw huge gains (Moderna rose fivefold) as billions of dollars were poured into the hunt for a vaccine. Environmental stocks, such as Tesla
TSLA
, were another significant winner as many authorities, including China and the EU, chose to direct stimulus into sustainable energy development.

The vaccine breakthroughs in November sparked a rapid rotation in stock market leadership, however. Investors dumped growth stocks and piled into airlines, oil plays, hospitality companies and financials, favouring these value names hardest hit by lockdown.

The questions facing investors now include whether tech can continue its market dominance, if value really is set for a resurgence and how to not overpay for exposure to the environmental theme. The more adventurous will also be keeping a close eye on commodity markets and trying to figure out if cryptocurrencies have now entered the mainstream.

Technology

With the technology mega-caps now accounting for around 25% of the S&P 500, there have been concerns about such a narrow range of stocks dominating the market.

Schroders head of global equities Alex Tedder says this is understandable, but he argues big tech’s share price gains were “justifiable” as lockdown rapidly increased e-commerce growth and companies shifted their businesses to the cloud.

“The technology sector in 2020, particularly the largest platforms, have delivered exceptional revenue and earnings growth which we believe will likely continue into 2021 and beyond,” he says.   

Tedder believes “technology will continue to provide a fertile hunting ground for investors in the coming years”.

However, he does expect the market to be led by a broader range of sectors next year and warns that regulation is facing a growing threat from regulation.

The Federal Trade Commission called for the break-up of Facebook earlier this month and in October the U.S. Justice Department filed antitrust charges against Google
GOOG
. The regulatory threat is by no means restricted to the U.S., with the European Commission trying to make tax charges stick against Apple and Chinese regulators trying to reduce Ant Group’s dominance.

Being market weight tech and adopting a more diversified approach could be prudent.

Value

The tech rally saw the valuation of growth stocks reach a 25-year high against value stocks earlier this year. Anyone who has been invested in a value fund for that time will tell you how bad it’s been. The average value fund has returned 624% since 1995 compared to growth funds’ 1,072% gain over that timeframe, according to Thomson Financial Datastream figures.

False dawns have been par for the course for value diehards, but supporters say the scale of the shift out of growth in November underlines the strength of the opportunity.

JP Morgan Cazenove and Morgan Stanley
MS
both told clients to take profits on tech and buy value in November when vaccine breakthroughs and Joe Biden’s victory in the U.S. presidential election sent stock markets to record highs.

RWC UK equity manager Ian Lance was even more effusive earlier this month, telling Financial News “this time it’s different”. He believes the opportunity to make “very attractive returns” rivals that seen in the aftermath of the 2000 dotcom crash or the financial crisis in 2009.

Not all agree though. Rathbones Global Opportunities fund manager James Thomson expects the value bounce to be short-lived, “because growth stocks thrive in a world where widespread and resilient, reliable economic growth is hard to find”.

While value stocks remain cheap, they tend to do best in times of economic growth, which will likely be scarce in 2021 as soaring debt levels and rising unemployment bite.

Environmental

Environmental stocks benefited from longer-term structural trends this year, as governments committed money to try and reduce emissions to meet future targets and improving investor sentiment.

The European Commission pledged in September that at least 30% of the massive €1.8trillion ($2.1 trillion) stimulus package it agreed to help the continent’s economy recovery from the pandemic “will be spent in support of our climate objectives”. China followed this by announcing it will become carbon neutral by 2060.

Reaching these targets will require massive amounts of investment in new technologies and infrastructure, which means “green has become the new black”, according to Saxo Bank head of equity strategy Peter Garnry.

He is not alone, with Morgan Stanley hailing the “rewarding opportunity” for investors. Valuations are undoubtedly stretched in places, however, with Tesla’s shares up 669% year to date, and Chinese electric car firm Nio, up 1,130% the most extreme examples of this.

Saxo Bank identified a basket of 56 stocks it will thinks will prosper, earlier this year.

The theme is very much a long-term one, but one institutional investors are taking seriously. A slew of new environmental mutual and exchange traded funds (ETFs) were launched last year to tap into record-breaking demand for sustainable investments.

Biden’s victory could provide fresh impetus and investors would be wise to have some exposure.

Commodities

The antithesis of environmental investments in many ways, the commodities market experienced a year of extremes in 2020. Gold prices hit a record high in summer on fears of a second wave of coronavirus, while oil prices turned negative back in April as demand collapsed.

The oil price has now recovered to above $50 a barrel and UBS has tipped oil companies to have the fastest growing revenues in 2021, rising sevenfold from the admittedly depressed levels seen this year. The Organization of the Petroleum Exporting Countries (Opec) earlier this month agreed to reduce output next year to support the oil price.

Gold remains as divisive as ever. After peaking at an all-time high of over $2,000 an ounce in August it has fallen back as investors switched into risk assets. British investment manager Ruffer, a long-term gold bug, took some profits on the precious metal in summer, but retains some exposure.

The mass printing of money to pay for countries’ Covid responses has stoked fears of inflation, however, prompting some to look again at the metal. U.S. dollar weakness could also provide a kicker to prices.

Credit Suisse
CS
believes the gold price can hit $2,200 next year, which would represent a 16.5% gain from current levels.

Gold proved its worth as a safe haven this year and could well again in 2021 if inflation begins to climb.

Cryptocurrencies

Also hailed as an excellent store of value by supporters, cryptocurrencies have posted exponential gains this year. After starting the year at just over $7,200, bitcoin, by far the biggest crypto, has surged more than 268% to a record high of $26,660.

Love it or loathe it, you can’t ignore bitcoin. Its market cap surpassed $500 billion for the first time yesterday as the value of a single bitcoin topped $28,000 for the first time yesterday. Anatoly Crachilov, founding partner of cyrpto investors Nickel Digital, insists the current rally is different to the 2017 bitcoin surge, which ended in a spectacular crash.

“Now we are seeing traditional asset managers and, increasingly, insurance companies exploring allocation to this asset class to address structural asset-liabilities mismatch, exacerbated by a $17 trillion pile of negatively yielding global bonds,” he said.

Ruffer bought $745 million worth of bitcoin in November as an example of institutional money buying the asset, but many others remain wary.  

Anyone looking to get in on the action must be mindful it remains a speculative investment.

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